Blame Emergency Rooms for the Out-of-Control Cost of Health Care

By Glenn Melnick

Dr. Melnick writes frequently on health care and the economy.

Sept. 5, 2018

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In most states, health care plans are required to tell their members to go to the nearest hospital in an emergency, even if that hospital is out of network.CreditCreditDavid Ellis/Aurora, via Getty Images

There are many reasons Americans pay more for health care than citizens of any other country. But one of the most powerful forces driving cost increases is buried in a little-known set of regulations concerning emergency room care.

These regulations have granted hospitals what is essentially a monopoly over emergency room patients, allowing them to charge basically whatever they want.

Readily available emergency treatment is among the most fundamental services of our health care system. To ensure it, most states require health care plans to tell their members to go to the nearest hospital in an emergency and that insurance will cover the visit — even if their plan does not have a contract with that hospital and the emergency care they receive will be out of network. This provision is meant to assure timely access to needed care and, although some patients have to wait hours to be seen by a doctor, and some still get hit with additional charges, it generally works pretty well.

The problem is that the rules give hospitals tremendous pricing power when they’re negotiating with health insurance companies. Increasingly, hospitals have learned that if they demand higher prices from health plans and do not get them, the hospitals can just cancel their contract. They will still get paid for treating emergency patients under those plans — and in fact will be paid more, because those patients will be out of network. (While this applies only to emergency room patients, about half of all hospital admissions come through emergency rooms.)

When there is no contract, the hospital issues a highly inflated “billed charge.” What was a $500 E.R. visit under a contract can become a $5,000 billed charge. This greatly reduces the health plans’ ability to negotiate lower prices.

Data from California illustrate how hospitals have exploited this situation. From 2002 to 2016, total billed charges by hospitals rose by a staggering $263 billion, to $386 billion, even though the number of patients admitted did not increase. Billed charges to health plans grew from $6,900 per day to over $19,500 per day. This astronomical run-up in billed charges gave California hospitals leverage to demand and receive much higher prices for in-network patients, too. The average price paid by health plans to hospitals for all care grew almost 200 percent — to $7,200 per day from $2,500.

In effect, they could threaten: Pay us $7,200 per day to sign a contract or $19,500 per day for emergency admissions without a contract.

Many patients might not know or care about this fight between hospitals and insurers. But they should.

Whenever insurance companies have to pay more, patients do too, in premium increases. In some cases, patients have to pay inflated out-of-network E.R. charges directly to hospitals in the form of “balance billing.” Hospitals are also expanding at a rapid pace, acquiring medical groups and other outpatient services, and they are using their E.R. power to gain higher rates for these other services, too.

States urgently need to change their regulations to limit hospital prices for out-of-network emergency care.

Capping billed charges at 125 percent of contracted prices would keep hospitals from exploiting their E.R. advantage. Maryland has instituted a policy along these lines. This change alone would result in immediate price reductions and savings to consumers exceeding many billions of dollars. And it would begin to restore some competition that would help keep prices down in the long run.

An American family of four with an employer-sponsored P.P.O. health plan now pays on average more than $28,000 a year for health care. If nothing changes, health care prices and insurance premiums will continue to grow. This will mean lower take-home pay for millions of working Americans and increases in the ranks of the uninsured. Public policy and hospitals are supposed to help us in emergencies, not create them.

Glenn Melnick is a professor of public policy at the University of Southern California and a researcher at its Schaeffer Center for Health Policy and Economics.